No Social Security COLA: How Unfair is That?

Now it's official. The Social Security Administration announced on Friday that there will be no cost of living adjustment for Social Security beneficiaries in 2011. Anticipation of the news inspired a blast of outrage about the unfairness of it all from organizations like AARP and the National Committee to Preserve Social javascript:;Security and Medicare. In response, Congressional leaders and the White House say they can't wait for Congress to return from campaigning so that it can vote each Social Security recipient a special $250 bonus to make up for the injustice imposed by the unCOLA. But is it really unfair?

Of course it is. Inflation wasn't zero in 2010. So how can there be no cost-of-living increase?
The same day that Social Security made its COLA announcement the Bureau of Labor Statistics announced that the CPI was, in fact, 1.4% higher in September 2010 than 12 months earlier. Prices were sharply higher for certain utilities and medical care, two areas of expense that matter a lot to seniors, and they are well aware of it, as one noted in one emotional response to Don Marron's blog:

I think it is communism not to give us elderly a cost of living raise. You tell us the cost [of living} hasn't gone up? Do you really think we are a bunch of idiots?

The explanation lies in Social Security's COLA rules, which require that the cost of living be measured by average monthly consumer price index during the third quarter and compared with the comparable figure from the third quarter of the last year that there was a COLA. And in fact, the CPI-W was 215.495 in the third quarter of 2008, the last year in which a COLA was calculated, and only 214.136 in the quarter just ended.

So despite the fact that some prices have gone up, the law clearly says no COLA. It turns out, a short-lived spike in fuel prices in the summer of 2008 caused third quarter CPI that year to come in 5.8% higher than the previous summer. So seniors got a 5.8% raise in 2009, even as consumer prices that year actually went down overall. To put it another way, Social Security beneficiaries had no COLAs in 2010 and will have none in 2011 because they got too big a COLA in 2009.

Okay, so the unCOLA follows the rules. But most seniors didn't have a zero-inflation experience in 2010. Isn't it just fair that we bend the rules for them?

Over the past two years, older Americans have paid more for utilities and food, experienced a decline in housing values, tried to recover from deep retirement account losses, struggled with rising health and prescription drug costs, and faced longer periods of unemployment for those who need to work. AARP is asking Congress to provide relief to millions of older Americans in the post-election session.

No one denies that seniors face a battery of hardships in this economy. But they're the same hardships faced by everyone. Working families also have to pay for rising health care and utility costs, and their wages have actually gone down by 2.8% since the onset of the recession. So strictly abiding by Social Security's rules hasn't cheated seniors. In fact, thanks to those rules, the recession has actually worked out better for them than for everyone else, granting them two year of oversized benefits while wage-earners-whose payroll taxes fund Social Security-were being cut back.

And it's not as if seniors are exactly ignored by the federal budget. Largely through Social Security and Medicare, Washington already spends $7 on every senior citizen for every $1 it spends on children, according to the Brookings Institution. That imbalance will only grow as the population ages. Unless something changes, by 2050 benefits paid to the elderly will soak up every tax dollar the federal government raises-not just social security payroll taxes but also income taxes, estate taxes, usage fees, Wall Street fines, everything. Yes, seniors need relief. But as a group they need it no more than anyone else, and they are already receiving more than their share of it.

So, uh, why is Congress so eager to pay Social Security recipients $250?
Because seniors vote and politicians can count. And because, egged on by interest groups like AARP, many seniors feel entitled to the money. As this column from Jason Zweig of the Wall Street Journal points out, people tend to be excellent at convincing themselves that what's in their self-interest is also the moral thing to do.

What's most unfair, perhaps, is the effect of this on the generations who are not yet of Social Security age. The roughly $14 billion needed to give $250 to every Social Security beneficiary will be borrowed--which is another way of saying it will be a tax on the beneficiaries' children and grandchildren. Before those generations begin to collect Social Security, Congress will have to cut back their benefits; simple arithmetic demands it. So, sooner or later, Congress will have to get tough about handing out $14 billion here and there to seniors, but the burden will fall on the folks who paying for this year's election year windfall, not the ones receiving it. How fair is that?